December 21, 2005

Sun Bin has a very interesting series of maps on World Population and GDP. Dave Altig at MacroBlog picks up on one of the maps, the sevices sector share as a % of GDP. Since one mark of economic development is the services share this is indeed revealing. As Dave points out China has clearly be come a significant outlier among would-be developed economies in its reliance on manufacturing share. This is unbalanced growth, and China needs to address this problem. Even after this weeks data revisions China is still a very services-light economy. What I found most surprising about the graph is the extent of services development in Brazil, Chile and Argentina. Are there some lessons for India from what has been happening in China. Raising GDP per capita at the end of the day also means moving up (not down) the value chain.

Umm..I’ve read your post a few times, I still don’t get it’s point. Probably a few statements like “China has clearly be come a significant outlier among would-be developed economies in its reliance on manufacturing share. This is unbalanced growth, and China needs to address this problem” & “Raising GDP per capita at the end of the day also means moving up (not down) the value chain.” need expansion (especially the second one, since it seems to be overstating the obvious) :)

I’m curious as to why you say that the services vs manufacturing imbalance needs to be addressed in China. When there is a continuous shift of manufacturing to China, what else can be expected? Aren’t the ‘developed’ nations leaning towards services, shouldn’t that be addressed as well? Maybe these two imbalances have something in common (hmmm, now that’s an original thought :) ).

I’m of the firm belief that economies finally find equillibrium in the end.

I am also confused by some of your statements. While Marco’s blog suggests that China has actuall bettered it services output, why this comment. And again being a hugely populous country it is mandetory to have large manufactring sector as major chunk of population is not able to get services jobs because of skills requirement (English/IT/Finance/Medicine/Hotel etc). In fact India needs to increase thrust on manufacturing.

“Aren’t the ‘developed’ nations leaning towards services, shouldn’t that be addressed as well?”

I suppose that this is by definition what developed means today: societies where there is a low proportion of value generated in agriculture and manufacturing industry. Both these move down the value chain as societies develop.

The only thing which maintains manufacturing industry labour intensive is the availability of cheap labour. By defininition, if this is what you do you will remain poor. The other solution, and its obviously one the Japanese are going for is robotics. A much more capital intesive manufacturing system, but by making robots eventually cheap, the relative cost of the capital also goes down.

“In fact India needs to increase thrust on manufacturing.”

It needs to increase thrust, but not to much, otherwise it will be in a dutch auction with China for who can sell their labour more cheaply. What India needs is equilibrated growth, less children and more and better eductation. If there is a skills-bottleneck because there are not enough educated people then this is a priority to address.

Now…..

Manufacturing can also be dis-aggregated, into components like marketing, accounting, design, sales etc. These are all essentially service activities. These are important in any scheme of development.

So what I am saying is that for better or worse both India and China have a large pool of cheap labour. In both cases this can be leveraged to facilitate development. But if you have an excess of manufacturing – where labour remains cheap, otherwise in come the robots – this is a lop sided development model. In this sense I think that India is already addressing the services issue much more than China is.

China’s growth is lop side and overly export dependent. At the end of the day they face the danger that the prices of their products have a deflationary component, and they find it increasingly hard to raise living standards.

“I’m of the firm belief that economies finally find equillibrium in the end.”

Yes, and this is what I’m saying, the equilibrated developed economy has 70 plus of GDP value in services and rising. China is in danger of falling into a manufacturing driven poverty trap. Language I think is an issue.

Edward, I can’t help but feel you have your analysis wrong in a number of aspects. An increase in Manufacturing & agriculture WILL increase ther overall per capita income & also bring an improvment in the lives of people. Today the software industry in India, having been the posterboy of modern india, benefits the educated members of the population , at the same time, agriculture & manufacturing benefits the un-educated majority too. In any emerging economy, dependence in manufacturing & agriculture isn’t a bad thing since these are areas where there is core competency. Growth in services sector WILL follow.

I don’t much care for your statement “It needs to increase thrust, but not to much, otherwise it will be in a dutch auction with China for who can sell their labour more cheaply”. While it is true that an employee in a Delphi or a GM plant in the US is paid $65 an hour and that kinda money you probably would probably pay an employee in India for 2-3 weeks. BUT I firmly believe that the Indian story atleast is not one of cheap labour. Infact if that was the case then there would be no export industry surviving in India, China (with no labour laws) would have swallowed our businesses a long time ago. There is a substaintial quality value addition that India brings to the table in most export industries, infact in areas like the leather industry there are Chinese companies now setting up manufacturing units in India (instead of the reverse).

As the world is shrinking, countries are gravitating to areas of core competency. Thats all. Colours in a map may look great but do they reflect ground realities, I doubt that. It is important to understand that there are differences in each geographical location & growth. Very macroscopically speaking, I think we are moving away from being a bunch of mixed economies to being economies that stick to certain core competencies.

So infact very crudely put we might end up having moving back to the barter system again, Argentina might exchange coffee and sugar with china for automobiles & garments etc. (Just a random thought, not very practical but possible).

Anyways I would like to know more about this ‘manufacturing drive poverty trap’ thought of yours.

“Today the software industry in India, having been the posterboy of modern india, benefits the educated members of the population , at the same time, agriculture & manufacturing benefits the un-educated majority too.”

Hi again R. Thanks for the comments. I take this point. I am not saying there is any easy answer here. The point is that there is a choice constraint. Energy that goes into developing industry cannot be deployed elsewhere.

Let me take a simple answer: why don’t women learn to hunt in foraging societies? Simply because the amount of time they could spend using those skills would conflict with their childrearing responsibilities.

If India goes into the business of low value (not the higher value manufacturing services) manufacturing activities bigtime (and as a major export activity, not for local needs) then the relevant skills have to be learnt. That has an on-cost, since once acquired they reproduce themselves and then you need to try and nudge-people-on to the next activity, which means learning and unlearning at the same time. European and US textile industries would be current example of this. There is huge political resistance to letting activities which have no continuing raison d’etre go.

I am not arguing anything dogmatically here. I am interested in sustainable development, and not cul-de-sacs. I wouldn’t presume to advise India, but I do think China needs to diversify, and quickly, since not only India, but other countries will soon be competing in the manufacturing market, and if sizeable over-investment takes place, global prices can plummet. I am more worried about global deflation than global inflation.

“As the world is shrinking, countries are gravitating to areas of core competency. Thats all.”

The underlying point I want to make is that you while you obviously need to improve the position of the vast majority of Indians, you simply can’t make this simple separation of interests. What is good for India’s educated population is good for the rest, depending…..

shows the type of manufacturing projects which can be extremely interesting in the future.:

“Huawei Technologies Co., Ltd. (“Huawei”), one of the world’s leading networking and telecommunications equipment suppliers, today announced that it has signed a contract with BT for the deployment of its multi-service access network (MSAN) and Transmission equipment for the BT 21CN network.”

“This is one of the single largest procurement programs undertaken in the communications industry, to underpin BT’s GBP10 billion 21st Century Network programme over the next five years. This rigorous authentication process was used to assess Huawei’s capabilities, which included the quality of Huawei’s products and solutions, direction of Huawei’s corporate development strategy, management system, quality control system, project management capability and corporate social responsibility. ”

“Huawei believes that the 21CN project and BT’s investment in Huawei’s innovation will spearhead the development of more new products and services for the British telecommunications industry and is of strategic importance to both UK businesses and economy. This will not only generate more new job opportunities within Huawei UK but also for our local service partners.”

The big point I am trying to make is that products and services (in areas of significant value added) are inextricably interlinked. Look at the issues involved in the authentification process, and note how Huawei’s locla (Chinese) partners are an important part of the picture. This means that to develop this kind of work the highly educated part of the workforce are vital. If India’s top level engineers are already being put under strain by the initial outsourcing boom, then the pace of manufacturing development will be too. India needs a massive investment in those highly educated members of the population.

Funnily enough this isn’t even a debate between Marxists and free-marketeers, since even some of the old Marxists used to talk in terms of combined and uneven development. At the same time some free-marketeers argue that India and China’s main economic (comparative) advantage is the cheap abundant labour supply. I am with the combined and uneven development people (although, of course, I am certainly not a Marxist). This is about whether you go for a model with more-or-less rigid schematisation and compartmentalisation of stages, or whether you have a more complex, multi-level approach.

Edward, I would like to take a bit of time to comment on what you wrote but before I do that I would like to highlight a very interesting point. Huawei’s software services business is housed in Bangalore, India. They have been there for the last 5 years.